Chapter 14, Problem 37ICA

(a).

To determine

Determine the key control list of the eleven controls.

Explanation of Solution

Sl. No	Key internal controls
1.	Segregation of the purchasing, receiving, and cash disbursements functions
2.	Purchasing can only make acquisitions from a preapproved vendor list
3.	Use of pre numbered voucher packages, properly accounted for
4.	Use of pre numbered checks, properly accounted for
5.	Use of pre numbered receiving reports, properly accounted for
6.	Internal verification of document package, including comparison to preapproved vendor list, before check preparation
7.	Review of supporting documents and signing of checks by an independent, authorized person
8.	Cancellation of documents prior to signing of the check
9.	Monthly reconciliation of the accounts payable master file with the general ledger
10.	Independent reconciliation of the monthly bank statements
11.	Independent review of financial statement disclosures related to acquisitions and cash disbursements

(b).

To determine

Determine the transaction related objective of each control that fully or partially satisfies the control.

Explanation of Solution

Key internal controls.	Transaction related audit objectives
Segregation of the purchasing, receiving, and cash disbursements functions	Cash disbursements are for goods and services and the audit objective is occurrence. The audit objective of segregation of purchasing is also occurrence.
Purchasing can only make acquisitions from a preapproved vendor list	The related audit objective is accuracy.
Use of pre numbered voucher packages, properly accounted for	Recoding of existing transactions- completeness.
Use of pre numbered checks, properly accounted for	The related objective is completeness.
Use of pre numbered receiving reports, properly accounted for	Recording of existing transaction- completeness.
Internal verification of document package, including comparison to preapproved vendor list, before check preparation	Accuracy, occurrence, posting and summarization, timing are related objectives.
Review of supporting documents and signing of checks by an independent, authorized person	Occurrence is the transaction related audit objective.
Cancellation of documents prior to signing of the check	Recording transactions for the goods and services which are actually received- occurrence.
Monthly reconciliation of the accounts payable master file with the general ledger	Posting and summarization is the audit related accounting objective.
Independent reconciliation of the monthly bank statements	Accuracy and completeness are the related objective.
Independent review of financial statement disclosures related to acquisitions and cash disbursements	Accuracy, completeness are the related objective.

 (c).

To determine

Identify the audit procedure to test each control.

Explanation of Solution

Key internal controls.	Audit procedure
Segregation of the purchasing, receiving, and cash disbursements functions	Discuss the duties with the person in charge.
Purchasing can only make acquisitions from a preapproved vendor list	Check the list and get it approved before making purchase.
Use of pre numbered voucher packages, properly accounted for	Go for a sequenced account of voucher package
Use of pre numbered checks, properly accounted for	Keep an account for sequenced checks.
Use of pre numbered receiving reports, properly accounted for	Go for a sequenced receiving reports
Internal verification of document package, including comparison to preapproved vendor list, before check preparation	Examine the documents properly.
Review of supporting documents and signing of checks by an independent, authorized person	Examine the checks signed.
Cancellation of documents prior to signing of the check	Examine the documents before signing.
Monthly reconciliation of the accounts payable master file with the general ledger	Examine the client’s accounts
Independent reconciliation of the monthly bank statements	Examine the bank reconciliation after completion
Independent review of financial statement disclosures related to acquisitions and cash disbursements	Examine the financial statement disclosure after completion.

(d).

To determine

Determine one substantive test of transaction for each test of control that indicates the efficiency of each test of control.

Explanation of Solution

Key internal controls.	Substantive test of transaction
Segregation of the purchasing, receiving, and cash disbursements functions	Examine entries in journal with that of invoices and reports.
Purchasing can only make acquisitions from a preapproved vendor list	Trace the transactions between the company and vendor.
Use of pre numbered voucher packages, properly accounted for	Reconcile vendor’s invoice to the journals.
Use of pre numbered checks, properly accounted for	Reconcile the various cash disbursements.
Use of pre numbered receiving reports, properly accounted for	Reconcile reporting reports to the journals.
Internal verification of document package, including comparison to preapproved vendor list, before check preparation	Examining the supporting documents.
Review of supporting documents and signing of checks by an independent, authorized person	Examine the supporting documents.
Cancellation of documents prior to signing of the check	Examine the journals
Monthly reconciliation of the accounts payable master file with the general ledger	Trace ledger with accounts payable
Independent reconciliation of the monthly bank statements	Examine the bank statements.
Independent review of financial statement disclosures related to acquisitions and cash disbursements	Reconcile the various cash disbursements

(e).

To determine

Determine one substantive tests of transaction for each transaction related audit objective for acquisitions and cash disbursements.

Explanation of Solution

Acquisition substantive tests of transactions

Transaction related audit objective	Substantive audit procedures
Occurrence	Review journal, ledger and other related items.
Completeness	Trace journal with vendor’s invoices.
Accuracy	Reconfirm the information of vendor
Posting and summarization	Trace the journal entries to accounts payable
Classification	Compare classification with invoices
Timing	Compare reports with invoices

Cash disbursements substantive tests of transactions

Transaction related audit objective	Substantive audit procedures
Occurrence	Review journal, ledger with cash disbursement
Completeness	Trace journal with vendor’s cash disbursement.
Accuracy	Reconcile the cash disbursements and examine them properly.
Posting and summarization	Reconcile the individual entries related to cash disbursement.
Classification	Compare the classifications of the vendor’s
Timing	Reconcile checks which are cancelled with the cash disbursement journal